Spain has legal requirement for its residents to make an overseas assets declaration, notifying the tax authorities of worldwide assets that they own or control.

Until recently, failure to make an overseas assets declaration, or submission of an inaccurate one, would result in costly penalties.  Unreported overseas assets that are later discovered by the authorities, may be treated as undeclared income on which tax should have been paid. The fines and penalties for such can amount to more than 150% of the undeclared asset value.

In January 2022, the European Court of Justice passed it’s ruling agreeing with the European Commission, that the penalties for failing to properly disclose overseas assets are excessive and contrary to EU statutes and principles.

The three judges ruled that the excessive sanctions for incorrect or late compliance are disproportionate and discriminatory.  Adding that the penalties may deter businesses and individuals from investing or moving across borders in the EU single market, thus interfering in key founding principles of the EU, the four freedoms.

As the ruling is binding, Spain faces the possibility of huge fines if it does not amend the law.  Spain has already taken steps to do so.  A headline in El Pais – Cincodias yesterday read ‘Treasury Corrects the Sanctioning Regime of Model 720 and Equates it to the General’.  The article further explains that the Senate has approved a series of amendments that set the statute of limitations at 4 years, removing the former scope of the law to look back on an unlimited basis.

So the tax office can now only review or investigate overseas assets declarations going back 4 years, and if you had assets abroad, and you can show that they originated in years outside this, you cannot be taxed or penalized for undeclared income.   It is yet to be revealed how the sanctioning regime in general will be adjusted to make the Law comply with the EU ruling.

The EU agree with the principle of the law, so putting aside the EU ruling regarding penalties and sanctions, the declaration of overseas assets continues to be mandatory, for all residents in Spain.

Overseas Assets Declaration – Law & Tax

The legislation, (LEY 7/2012, de 29 octubre, de prevención y lucha contra el fraude fiscal), was passed in Spain in 2012.  Whilst it was aimed at deliberate high level tax evaders, the fact it allows penalties to be imposed simply for non-declaration of overseas assets, means that expats and other foreigners living in Spain, who are likely to have such assets, really need to understand the implications of this law, and make their declaration correctly, so as not to fall foul of this rather intrusive legislation.

The overseas assets declaration is an information gathering exercise, and not a tax return.  Therefore someone making or considering doing an overseas assets declaration should be aware that they are not declaring assets so that they can be directly taxed.  They should however be mindful that declaration of certain types of assets, may make the authorities aware of sources of income or capital gains for example, that could be deemed to be subject to tax in Spain. With this in mind, it is also important to understand Spanish taxation, and to make sure that assets are organised efficiently, considering tax in Spain, in order to avoid paying additional tax or amounts unnecessarily.

Making an Overseas Assets Declaration

An overseas assets declaration is made by completing a form known as ‘Modelo 720‘. The deadline for submitting the form is the 31st of March, and generally speaking the declaration only needs to be made once, as subsequent declarations are only necessary if assets have been acquired, or disposed of, or if existing declared assets have increased in value above a given amount.

The legal requirement to make an overseas assets declaration in Spain, and the potentially high penalties for not doing so, brought a massive change for both foreign and Spanish nationals resident in Spain. Some have even made the decision to leave the country as a result – these primarily those whom the law is aimed at – individuals for whom making the declaration would implicate them in tax avoidance or indeed evasion.

Whilst this law and reporting requirement might seem intrusive, it is in reality only a small move by the authorities, in their steps to counter the country’s rampant tax evasion.  For British expats, in particular retirees, Spain can actually be better than the UK where tax is concerned, because of the more favourable tax treatment of some types of pension income.  If you have concerns relating to the overseas assets declaration, as with anything relating to financial, tax or legal matters, we recommend that you consult a relevant and suitably qualified professional.

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